Board of Directors | Company Law - CLAT PG PDF Download

Board of Directors

• The Board of Directors is a core group in a company, chosen as per legal and internal guidelines. The members, known as directors, have limited management power unless specifically granted by the Board.
• The Board ensures that management acts in the best interests of all stakeholders, particularly shareholders who aren't involved in daily operations. They have a trust-based role, responsible for the company's welfare.
• The Board can exercise most company powers collectively, except those reserved for general meetings by law.

Role of the Board of Directors

The Board of Directors is responsible for:

• Formulating policies
• Setting up the organization to implement these policies
• Controlling and directing the company's affairs
• Gathering resources to meet company objectives

Definition and Composition

• As per the Companies Act, 2013, the Board of Directors is the collective body of a company's directors.
• Only individuals can be appointed as directors; no corporate bodies or firms are allowed.

Directors' Meetings

Board Meetings are a crucial aspect of a company's governance, enabling the Board of Directors to oversee management and make day-to-day decisions.

Key Points about Board Meetings:

• First Board Meeting: Companies must hold their first board meeting within 30 days of incorporation.
• Annual Requirement: At least four board meetings are required each year, with no more than 120 days between two consecutive meetings.
• Participation: Directors can participate in meetings via videoconferencing or other audio-visual means, although certain matters cannot be addressed this way.
• Notice: Directors must receive at least seven days' notice for a board meeting. In urgent cases, shorter notice is acceptable if at least one independent director is present.
• Quorum: Quorum for a board meeting is either two directors or one-third of the total strength, whichever is higher. Directors attending in person or via audio-visual means count towards the quorum.

Board Composition

Minimum/Maximum Number of Directors in a Company [Section 149(1)]

• Public Company: Minimum of 3 directors.
• Private Company: Minimum of 2 directors.
• One Person Company (OPC): Minimum of 1 director.
• Maximum Number of Directors: 15 directors without special compliance. More than 15 directors can be appointed by passing a special resolution.
• Section 8 Companies: Exempt from the maximum limit on the number of directors.
• Residency Requirement: At least one director must have stayed in India for a minimum of 182 days in the previous calendar year.
• Women Director Requirement: Certain classes of companies must have at least one woman director as per Rule 3 of the Companies (Appointment and Qualification of Directors) Rules, 2014.
• Director Limit: Maximum of 20 directorships, with a limit of 10 public companies. Section 8 companies are not counted in the total.

Quorum for Board Meeting Requirement

• Quorum for Board Meeting = 1/3rd of Total strength or two directors, whichever is higher.
• A Director participating through video conferencing/audio-visual modes will also be counted for quorum.
• Any fraction of a member will be rounded off as one.
• Total strength shall not include directors whose places are vacant.

Power of Board [Section 179]

• Section 179 of the Act outlines the powers of the board. The board of directors is vested with the authority to perform acts and things for which the company is authorized.
• However, the board can only act within the powers vested in them and not those reserved for the general meeting.
• Certain powers of the Board of Directors, as specified in Section 179(3) and Rule 8 of the Companies (Management & Administration) Rules, 2014, must be exercised through resolutions passed at Board meetings. These include:
  • Making calls on shareholders for unpaid money on shares.
  • Authorizing buy-back of securities under section 68.
  • Issuing securities, including debentures, both in India and abroad.
  • Borrowing monies.
  • Investing the company’s funds.
  • Granting loans or providing guarantees or security for loans.
  • Approving financial statements and the Board’s report.
  • Diversifying the company’s business.
  • Approving amalgamation, merger, or reconstruction.
  • Taking over a company or acquiring a controlling or substantial stake in another company.
  • Making political contributions.
  • Appointing or removing key managerial personnel (KMP).
  • Appointing internal auditors and secretarial auditor.
• The Board may delegate certain powers, specified in points (4) to (6) above, to committees of directors, the managing director, the manager, or other principal officers of the company, as per conditions set by the Board.
• Banking companies are not covered under this section.

Restriction on Powers of Board [Section 180]

• The board can only exercise the following powers with the consent of the company through a special resolution:
• (a) To sell, lease, or dispose of the whole or substantially the whole of the company's undertaking, or the whole or substantially the whole of any of its undertakings if the company has more than one undertaking.
• (b) To invest, other than in trust securities, the amount of compensation received as a result of any merger or amalgamation.
• (c) To borrow money where the total borrowed, including existing borrowings, exceeds the aggregate of paid-up share capital, free reserves, and securities premium, excluding temporary loans from the company’s bankers in the ordinary course of business.
• (d) To remit or give time for the repayment of any debt due from a director.

Contributions to Charitable Funds and Political Parties [Section 181]

• The board has the power to make contributions to 'bona fide' charitable and other funds, subject to certain limits.

Prohibitions and Restrictions Regarding Political Contributions [Section 182]

• A company, other than a government company in existence for less than three financial years, may contribute any amount directly to any political party.
• The limit for contributions to political parties is 7.5% of the average net profits during the three preceding financial years.

Power of Board and Other Persons to Make Contributions to National Defence Fund

Section 183

• The Board can contribute any amount it deems appropriate to the National Defence Fund or any other government-approved fund for national defence purposes.
• The company must disclose the total contributions made during the financial year in its profit and loss account.
• In the case of P.S Offshore Interland Services P Ltd v. Bombay Offshore Suppliers Ltd, it was determined that a closed or non-operational unit of a company can be considered an undertaking.
• In Pramod Kumar Mittal v. Andhra Steel Corpn Ltd, it was established that various types of businesses and assets are integral parts of a complex undertaking and cannot be separated.

(b) To remit or grant time for repayment of any debt owed to the company by a director, except in cases of renewal or continuation of an advance made by a banking company to its directors in the ordinary course of business.

(c) To invest the amount of compensation received for the compulsory acquisition of any undertaking or property of the company, excluding trust securities.

(d) To borrow money, and when the total amount to be borrowed (including existing borrowings) exceeds the paid-up capital and free reserves of the company. Free reserves include reserves in the share premium account, general reserve, profit and loss account, and capital redemption account. Temporary loans raised from banks in the ordinary course of business are excluded. However, loans for financing capital expenditure are not included.

(e) To contribute to charitable and other funds not directly related to the company's business or employee welfare, amounts exceeding fifty thousand rupees or 5 percent of the average net profits of the last three financial years, whichever is greater.

Power of Directors to Allot Shares

• Directors of a company have the authority to issue shares, but this power must be exercised in good faith for the benefit of the entire company, as it is a fiduciary responsibility.
• In the case of Grant v. John Grant & Sons Ltd, it was ruled that if the company does not require additional capital and the directors issue shares solely to maintain control or to oppose the majority shareholders' wishes, the allotment is improper.
• In Punt v. Symons & Co Ltd, directors issued shares to create a majority for passing a special resolution that would revoke certain special rights of other shareholders. This was deemed an unfair and non-bona fide exercise of power.
• In Pierey v. S Mills & Co Ltd, directors issued shares to prevent the election of three additional directors who would have made the existing directors a minority. This action was also considered improper.

Power of Directors to Make Calls on Shares

• The Articles of Association of companies typically grant directors the authority to make calls in advance from shareholders regarding unpaid amounts on shares.
• The power to make calls is a fiduciary duty and should not be used by directors for personal gain.
• Directors cannot delegate this power to committees, managing agents, secretaries, treasurers, or managers.
• In the case of Poiner Alkali Works Ltd v. Amiruddins. Tayyabji, it was ruled that if the articles state that every shareholder must pay the amount of every call to the persons and at the time and place specified by the directors, the resolution must specify the time, place, and amount of the call payment.
• In East and West Insurance Co Ltd v. Mrs. Kamla Jay anti Lsl Mehta, it was held that if the board of directors does not fix the time for call payment, the call is valid even if the place and person for payment are not specified.
• A valid resolution making a call must include:
  • The amount of the call,
  • The time when the call should be paid,
  • The person to whom the payment is to be made, and
  • The place where the payment is to be made.